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다국어 초록 (Multilingual Abstract)

Watts and Zimmerman (1986) suggest that external auditing serves a monitoring role, with the intensity or level of demand related to the level of agency costs. The Act on External Audit of Corporation(AEAC) stipulates accounting and auditing-related rules for joint-stock corporations. Under the AEAC, a company with assets of 7 billion won or more must issue audited financial statements. The government justifies the regulation by a statement that the benefit of audit involvement will outweigh the costs. This study questions the validity of the claim, and investigates whether external audits for non-listed small firms are indeed beneficial to increasing the reliability of financial statements. In addition, it also examines whether the efficacy of the external audit, measured by discretionary accruals, varies with the type of audit firms. In order to investigate these issues, this study compares the annual data of the auditees before and after the initial external audits using discretionary accruals. Audit quality is defined as the likelihood that the auditor will discover given accounting irregularities and errors (competence) and report the discovered irregularity (independence). The extent to which the reliability of accounting information enhances depends on audit quality. DeAngelo(1981) argues that firm size affects audit quality. Due to client-specific quasi rents, auditors with a greater number of clients have more to lose by failing to report a discovered breach in a particular client`s records. This collateral aspect increases the audit quality supplied by large audit firms. Based on this argument, we hypothesize that initial statutory audit decreases discretionary accruals, and the decrease is greater for firms audited by higher quality auditors. While Big 5 CPA firms are usually identified as high-quality auditors in the literature, the adoption of such a measure in Korea poses a problem since these Big 5 auditors dominate the stock market. The audit market for small firms is still dominated by domestic CPA firms. Thus, the identification of quality auditors in the market for small firms is rather complex. This study is motivated by a need to understand whether the audit market for small firms is able to differentiate between high-quality and low-quality auditors. To shed some light on this issue, we provide joint tests of (1) whether an initial statutory audit can increase credibility of financial reports, (2) whether large auditors are associated with higher accounting transparency. It is hypothesized that audit quality is more greatly differentiated between big and small audit firms in the context of small firm audits than in the case of listed firm audits discretionary accruals of firms audited by big audit firms are likely to be smaller than that of firms audited by small audit firms. The sample consists of 571 initial statutory audit firms between 2000 and 2004. We examine the sample firms for three years surrounding the initial statutory audit year (from -1 to +2 years) to measure whether they opportunistically manage earnings. Audit firms are classified into four groups-Big 5, Local Big, Local Small, and Individual CPA groups- depending on legal form, the firm size, and their affiliation with foreign Big 5 firms. The results indicate that when analyzing the four groups together, audited financial statements have a relatively smaller discretionary accrual than unaudited statements as a result of increased reliability. In other words, audit involvement did not have a substantial impact on the financial data. However, when analyzing each group separately, only the small firms audited by Local Small showed a decrease in discretionary accruals after the audit. The discretionary accruals for Big 5, Local Big, and Individual CPA groups were not statistically different before and after the audit. The time-series pattern of discretionary accruals is presented in Table 9.The values of discretionary accruals for initially audited years are significantly different from zero. This evidence indicates that audited financial statements have relatively smaller discretionary accruals than unaudited statements as a result of increased reliability. Table 10 indicates the estimated results of the research model. This analysis does not support the hypothesis that discretionary accruals of the firms initially audited by high quality audit firms are likely to be smaller than those of the firms audited by low quality audit firms. The estimated regression coefficient of the AUDIT variable is not statistically significant for Big 5, Local Big, and Individual CPA groups, but significant for Local Small. Our evidence, in general, suggests that in the case of auditing non-listed small firms, proper selection of auditors is crucial in improving the reliability of the financial data. However, this does not mean that other types of auditors such as Big5, Local Big, and Individual CPAs are to be excluded from the financial reporting process of small firms.

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참고문헌 (Reference)

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